Network Effects in Telecommunications: When Entrants are Welcome

This paper looks at the role of network effects in telecommunications markets. Network effects are said to exist when an existing user of a network benefits from any new user to the network. Even the expectation of a large network will positively influence users' willingness to pay. After the identification of network characteristics in telecommunications, the incentive to invite entry to an incumbent telecommunications firm is discussed. For the case of mobile tele-communications, the extension of network coverage is introduced as a potential means to commit to a large network size, influencing consumers' expectations. It turns out that with mobile telecommunications, increasing network coverage might even reinforce the incentive to welcome entrants.